The Australian Competition and Consumer Commission (ACCC) released its final report for its inquiry into foreign currency conversion services on September 2, 2019.
The purpose of the report was to investigate the pricing of currency conversion services, the level of competition, and the ability of consumers to comparison shop.
Before joining Zafin’s executive leadership team, I spent 25 years in banking, most recently at HSBC as Global Head of Product for Cash Management. As such, the content of the report is of particular interest to me. My goal is not only to tell you what the report is about, but what you can do to respond. Below are my key takeaways on: transparency in fee presentation, opportunity in the migrant worker remittances market, and fees in the Foreign Exchange (FX) market.
1. Make Fees More Transparent
The ACCC levelled criticism of Australian banks on fee transparency, with correspondent banking fees being a significant source of consumer frustration. “In an extreme case, an Australian consumer has told the ACCC they sent the equivalent of AUD100 to a recipient in Romania and only AUD8 arrived in the destination after all fees were deducted.” (ACCC pg. 9)
A fundamental advantage of monoline competitors like TransferWise is that they do not have to pay correspondent banking fees. Instead, firms like TransferWise work by having local operations pay out transactions in the desired currency. Since no money leaves the sender’s country, no correspondent banking fees are charged (see table below). (ACCC pg. 76)
Inquiry suppliers are aware of how correspondent banking fees affect the customer experience, with one bank noting that: “[t]he customer experience is not great…. [w]ith the introduction of digital disruptors (e.g. TransferWise) and greater regulatory and compliance focus placed on global payments, there is pressure on banks to reduce costs and increase
transparency of fees.” (ACCC pg. 85)
Failing to disclose correspondent banking fees that may be deducted from the international money transfer (IMT) could, in the ACCC’s view, “contravene the Australian Consumer Law”. (ACCC pg. 86) Banks are in a situation where failing to inform customers of their fees crosses into the realm of being non-compliant. Banks must act quickly to ensure that their systems can handle these demands at scale.
Zafin’s solutions eliminate legacy constraints and allow your bank to present both the Foreign Exchange margin and the fee associated with the payment to your client. Zafin also enables you to give customers insight into if and how correspondent bank fees will affect the beneficiary’s receipt of funds.
2. The Migrant Worker Remittances Opportunity
Remittances sent from Australia to other countries in the South Pacific are a key component of the region’s economy and account for a growing number of FX transactions. Quoting the World Bank, the ACCC says: “…migrants residing in Australia remitted AUD8.8 billion overseas in 2017.” (ACCC pg. 82) This is almost 42% of the AUD21 billion of personal IMTs that Australians sent in 2017. (ACCC pg. 8)
To date however, the big four banks have not pursued the full potential of this market. According to internal documents from one inquiry supplier:
“The traditional (Big Four) Australian Banks’ strategy (including [redacted bank]) have chosen to focus on maximising their revenue through margin at the expense of flow allowing the mono-lines to penetrate reduced margin business. [sic]” (ACCC pg. 43)
To compete more effectively for this market share, Australian banks should do two things. First, they should deploy corridor-specific pricing strategies. Differentiating their pricing in specific corridors that migrant workers use would allow them to capture market share without lowering their general retail margins. As a world-leading banking software provider, Zafin’s software enables your bank to implement segment and corridor-specific pricing strategies targeted towards migrant workers without affecting other Foreign Exchange customer groups.
Second, banks need to focus their marketing on the trust consumers place in them. According to one big four bank, “…it can be argued that banks offer a more appealing value proposition to many consumers. Our research suggests that when sending large sums of money overseas, customers value the choice, convenience and security (trust) offered by banks.” (ACCC pg. 72)
Though the ACCC found that mistrust in monolines was completely misplaced, banks emphasising their reliability alongside special corridor rates would give them a different and compelling value proposition.
3. Why Australian Foreign Exchange Fees Are So High
In my discussions with FX Markets and Transactional banking leadership around the world, there is a recognition of the need to move beyond the bounds of the bank’s internal profit architecture to get a pricing outcome that optimizes client value and bank returns. When both groups are not aligned, in the words of one FX head from a tier-1 U.S. bank, this results in them “massively over-inflating their price point.”
This tension is a key driver behind higher Australian FX prices. The ACCC found that customers who used the big four banks to send IMTs in USD and GBP during 2017-2018 “could have collectively saved about AUD150 million if they had instead used the lowest priced IMT supplier.” (ACCC pg. 8)
The average price of sending an IMT from Australia is higher than both the G20 average price and the global average price. For customers who use IMT services frequently or for large transactions, the savings would be even greater, as illustrated by the chart below. (ACCC pg. 45)
One of the reasons competitors like TransferWise are able to keep fees so low is that they have a unified p&l are able to price IMTs accordingly. Zafin’s technology helps enable greater alignment between FX stakeholders in the bank. By enabling banks to operate more like the monolines they are competing against, while maintaining the advantages of being incumbents, they are better positioned to adjust to changing business and regulatory environments.
Conclusion: Now what?
Zafin’s systems can protect your bank’s Foreign Exchange market share from monolines like TransferWise by pricing customers based on their entire relationship with you. Making the most of existing customer relationships is a crucial component of how banks can defend and grow their market share.
Offering discounted FX transactions as part of a product bundle builds strong customer relationships from the moment they open an account. Targeting this same perk to loyal customers who might be using other services gives them a chance to try your service while deepening their relationship and disincentivizing them from using non-bank services.
TransferWise doubled their Australian flow to AUD6 billion between 2017 and 2018, and is striving to hit 15% market share. It took them seven years to do this in the UK, where they are now aiming for 25% of the market. By leveraging both consumer trust and Zafin’s technology, your bank can build a unique and durable competitive advantage that can protect and grow its market share.
Concurrently, Zafin can help your bank substantively respond to the ACCC recommendations. The Australian government has indicated that it will legislate the ACCC recommendations if banks do not sufficiently adopt them. With open banking legislation set to roll out this July and AUSTRAC cracking down on violators, ensuring your bank’s compliance has never been more urgent.
Dozens of banks around the world, including a Tier-1 Australian bank, use Zafin to strengthen their offerings and incentivize existing customers to grow their accounts. Your bank needs to be prepared to respond to the ACCC’s recommendations and keep pace with monoline competitors—book a consultation with me today and let’s talk about how we can work together to make both of these happen.
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